LONDON, July 7 Reuters The British pound on Friday edged back towards a twoweek high reached against the U.S. dollar the day before, supported by interest rate differentials as Britain looks set to outpace the U.S. and Europe on rate rises this year.

The Federal Reserve paused its tightening cycle in June and although it looks likely to resume rate increases this month, it appears closer to the point where it will take stock of past rate increases as inflation shows signs of slowing.

In contrast, the Bank of England this month raised the bank rate by half a percentage point and markets are pricing another 150 basis points of tightening by the middle of next year as inflation remains sticky.

Consumer price inflation stood at 8.7 in May, unchanged from April and 0.3 percentage points higher than the BoE expected in their May monetary policy report.

Stephen Gallo, global FX strategist at BMO Capital Markets, said the pound was well supported against the dollar and euro as the market narrowly focuses on rate differentials as opposed to why UK rates are expected to rise further.

When the cure is pricing in 6 plus handle for Bank Rate it39;s kind of hard to see FX investors with very small investment horizons shorting sterling aggressively, Gallo said.

The longer GBP and UK yields stay supported in the shortrun because of sticky inflation and a hawkish BoE, most likely the deeper correction lower in GBP later on, Gallo added.

The pound was last up 0.1 against the…